Competitiveness and Private Sector Development

This series of publications addresses different aspects of private sector development in non-OECD regions, including the Middle East and North Africa, South East Europe and Eurasia. Reports provide recommendations at the national, regional and sector level to support countries in improving their investment climate, enhancing competitiveness and entrepreneurship, raising living standards and alleviating poverty.

With a total population of 92 million people, near universal literacy and abundant energy resources, Central Asia is an attractive destination for investment and trade. The region is strategically located at the crossroads of Europe and Asia, and surrounded by some of the world’s fastest-growing economies such as Russia, India and China, who are increasingly investing in the region. From 2000 to2009, foreign direct investment flows into Central Asia increased almost ninefold, while the region’s gross domestic product grew on average by 8.2% annually.

While Central Asia is endowed with many natural and human resources that could drive its economies to even higher levels of competitiveness, the poor quality of the region’s business environment remains a major obstacle. Key areas for improvement include reinforcing legal and economic institutions; prioritizing the development of the small and medium-sized enterprise (SME) sector; and building the capacity of business intermediary organisations.

This Central Asia Competitiveness Outlook examines the key policies that would increase competitiveness in Central Asia and reduce dependence on the natural resource sector, namely through developing human capital, improving access to finance, and capturing more and better investment opportunities. It was carried out in collaboration with the World Economic Forum under the aegis of the OECD Central Asia Initiative, a regional programme that contributes to economic growth and competitiveness in Afghanistan, Kazakhstan, the Kyrgyz Republic, Mongolia, Tajikistan, Turkmenistan, and Uzbekistan. The Initiative is part of the wider OECD Eurasia Competitiveness Programme.

For almost a decade, the economies of Central Asia have achieved some of the world’s best growth performances. Their significantly improved competitiveness has attracted a new wave of FDI into the region. The region’s potential is fuelled by vast energy and agricultural resources, a strategic location at the crossroads of Europe and Asia and nearly universal literacy rates.

This report is the outcome of work conducted by the OECD Eurasia Competitiveness Programme under the authority of the Central Asia Initiative Steering Committee (referred to in this publication as the "OECD"), in consultation with governments and the private sector in all seven countries of the region. A number of Ministries, government agencies, and private sector associations of the following countries contributed by their input to this report: The Islamic Republic of Afghanistan, the Republic of Kazakhstan, the Kyrgyz Republic, Mongolia, the Republic of Tajikistan, Turkmenistan, the Republic of Uzbekistan.

With a total population of 92 million people, Central Asia boasts near universal literacy and abundant natural resources. However these resources are unevenly distributed amongst the countries of the region. Kazakhstan, Turkmenistan and Uzbekistan are heavily reliant on exports of energy resources, whilst the economies of Afghanistan, Kyrgyz Republic, Mongolia and Tajikistan are mainly based on agriculture or primary products like copper and gold.

Central Asia’s advantages of strategic location, high literacy rates and vast natural resources, coupled with growing foreign direct investment (FDI) and enhanced productivity, have led to above-average growth over the past 10 years. However, to sustainably raise its competitiveness, the region must make further gains in productivity. This chapter provides an overview of the key findings of the report in priority areas for reform: education, access to finance and investment policy and promotion. It notes that education must provide skills demanded by the market through dialogue with employers; SMEs, essential for growth, must have easier access to finance; and the investment climate must be enhanced by improving investment policy and promotion. A case study on Kazakhstan, the final chapter of the report, outlines possible strategies – which may be applicable to other economies of the region – to diversify sources of FDI and enhance sector competitiveness.

In this chapter, the competitiveness of four Central Asian economies – Kazakhstan, the Kyrgyz Republic, Tajikistan and Mongolia – is analysed according to the World Economic Forum’s Global Competitiveness Index. Key conclusions are that all four economies share the competitive advantage of labour flexibility but suffer from underdeveloped financial markets, low levels of competition, inefficient infrastructure and fairly poor quality of education. It notes that recent efforts towards improving competitiveness have improved the positioning of Mongolia and the Kyrgyz Republic, while Kazakhstan and Tajikistan have lost ground.

Central Asian economies can boost their competitiveness by building on the strengths of their education systems: high literacy rates, high primary and secondary enrolment for both sexes and an above average enrolment in tertiary education. Their numerous disadvantages include excessive central control and low public spending per student. Central Asian countries should collect and report educational data, develop strategies for raising the quality of tertiary education and improving graduation rates, create strategies for making vocational education and training (VET) more relevant for the labour market, reduce state control and consult with employers’ representatives to achieve a balance between higher education and VET enrolments. Public spending should concentrate on better distribution of resources. Afghanistan, which is trailing other countries of the region in educational performance, must focus on laying solid a foundation for the future by investing in better and more equal enrolment and more highly-trained teachers.

Access to finance is critical to further enhance the competitiveness of Central Asia. Financial systems in the region are not yet globally integrated (except for Kazakhstan) and often do not provide a diverse range of financial products to local businesses. Moreover, there is still a gap in access to finance which disproportionately affects small and medium-sized enterprises (SMEs). This chapter concludes that in addition to pursuing reforms to improve the financial system as a whole, more support should be given specifically to institutions that specialise in financing the SME sector, and to targeted instruments such as guarantee schemes.

Foreign direct investment (FDI) flows are increasingly important as a source of finance for Central Asian economies. To unlock their full potential, a second generation of reforms is needed to improve the investment policy framework. Key areas to address are land reform, removing sector restrictions and enforcing intellectual property rights. Policy makers from Central Asia also need to focus on diversifying the sectors receiving FDI and building further investment promotion and facilitation capabilities. Investment promotion activities should be based on efficient use of resources, linking promotion efforts to investment zones and industrial policy objectives, as well as supporting regional development.

Kazakhstan’s strong economic performance has been driven largely by its natural resources sector. The oil and gas sectors alone attract three quarters of foreign investment inflows. However, Kazakhstan’s non-energy sectors with their competitive advantages could be potential new sources for growth. This chapter is based on the OECD Kazakhstan Sector Competitiveness Strategy report pre-published in November 2010. It provides an assessment and strategy to help Kazakhstan enhance the competitiveness of several non-energy sectors, with a focus on agribusiness. Some of its conclusions could be applicable to other economies of the region.